View Full Version : Should we return to the Gold Standard?

01-25-2012, 04:42 PM
Should we return to the gold standard?

Is it time to take the control of our currency out of the hands of the Government and Bank of England?

By Kathleen Brooks, Director of Research UK, Forex.com | Yahoo! Finance UK – 23 hours ago

For hundreds of years currencies were based on a single pound, dollar or franc being worth a set amount of gold or silver*.

But with banks in trouble and governments in the West burdened with literally trillions of debt (like the UK, whose debt burdened jumped to £1 trillion last month), are currencies that we know and love actually worth anything anymore?

At the same time as we see some European economies teeter towards bankruptcy then the luster of currency values of yore, like the gold standard, can appear very attractive. So why not return to it? It’s a cause many are starting to rally to, but they’re wrong and this is why.

The call of gold

Newt Gingrich and Ron Paul are on the campaign trail to try and win the Republican nomination for the US Presidential, both of whom are proponents of “hard” money. Their reasons to switch from fiat money (what we have now) to a currency backed by “something” like a precious metal, is to “take government out of the business of controlling the money supply” according to Gingrich.

That is a dig at the Federal Reserve (who some Republicans either want to disband or arrest, depending on who you talk to) which has printed dollars and expanded the money supply through its programme of quantitative easing and also boosted the size of its balance sheet by a whopping $2 trillion dollars in the last four years.

Gingrich and Co. argue that the US is losing its credibility on two fronts: Firstly an enlarged money supply can lead to more inflation down the road and, secondly, the Fed could be accused of printing money to pay off the US’s enormous $15 trillion debt, thus denting the US’s reputation especially in eyes of its many foreign creditors.

Although it might be a stretch to believe that Newt will get all the way to the White House – although stranger things have happened – so what would a return to the gold standard be like?

How things would change

Firstly, we’d have to stop thinking of a currency in terms of a value against another currency. Right now the dollar may be trading at $1.30 to the euro. The value is based on the market’s weighing up the political and economic risk of the two countries and coming up with a “fair” value. Instead, if the world went back to the gold standard we would need to think of the euro and dollar in terms of the yellow metal not with each other.

But what about the actual value? A currency’s worth on the gold standard comes down to the amount of gold reserves its government has. (That’s bad news for the UK after the bulk of UK reserves were sold off by Gordon Brown back in 2000). So let’s take the US – the world’s largest holder of gold.

It has 8,656 tonnes – or there about – of gold stored away at Fort Knox in Kentucky and a few other places. So its currency would be worth more than a country with far fewer reserves, like the UK for instance. Germany has the second largest reserves; however they are less than half of US holdings at 3,700 tonnes. However, France, Italy and the Netherlands all rank in the top 10 biggest for gold reserves, and combined the EU nations have bigger reserves than even the US.

So the dollar and the euro would be the most powerful currencies worldwide, with no one else even close, but the UK doesn’t even feature in the top 15 holders of gold reserves, so the pound could theoretically be worth less than the Russian rouble and Chinese renminbi.

Herein lies the problem with the gold standard. Some of the world’s biggest export powerhouses like China, Taiwan and other emerging markets have been buying up hoards of gold in recent years. A return to the gold standard would cripple their economies because the value of their currency would rise.

In contrast, a country like the UK that is a major consumer, would suffer as imports would become more expensive thus threatening the British economy with inflation.

A tool of the rich

And this isn’t the only problem. Gingrich needs to be careful if he is calling for a return to the gold standard. In the 1896 and 1900 Presidential elections, Democratic candidate William Jennings Bryon called the gold standard the tool of the rich, as the US suffered three depressions as a “result” of the gold standard according to Bryan.

Thus Gingrich’s whole-hearted support of a return to hard money could lead to some harsh rebukes from his Democratic rivals.

Going back to Newt’s main argument in favour of the gold standard, controlling your money supply is a double edged sword. The current system allows you to do it too much, which can lead to hyper-inflation and debt monetisation à la Argentina, but the gold standard doesn’t allow you to do it enough.

Rather than use interest rates to relieve an economic slump, things aren’t that simple. You can only adjust the supply of currency in the economy based on the amount of gold you have.

But with gold a fairly scarce resource and production of the precious metal expensive and fairly limited, boosting your money supply when economic conditions deteriorate isn’t going to be that easy. Which is why the gold standard is blamed for causing economic hardship: It doesn’t allow the money supply to efficiently adjust to the economic conditions at hand.

Keeping constant exchange rates

Some argue that having a gold standard actually helps world trade as it reduces some of the exchange rate volatility that plagues the fiat system. Add that to the anti-hyper-inflation argument and Gingrich could win some people over to his camp.

Believe it or not, but throughout history the “value” of money has changed many times. Globally we currently have a system of fiat money, which means that the value of our coins and bank notes are commanded by the authority or fiat of the government.

However, in the past currencies have been backed by gold and even silver. The British ditched the gold standard in favour of fiat to fund its efforts in the Napoleonic wars in the 19th Century. In World War One out went the gold standard only to be brought back in again in peace time.

Since we’ve just been through the Lehman crisis and are quite possibly still in the eye of the storm of the eurozone sovereign debt crisis, then history would suggest that now is not a prescient time to return to “hard” money.

*We talk about “pounds sterling” because 240 sterling silver pennies originally weighed one pound. Sterling silver was introduced in 1158 by Henry II because it was harder and less prone to wear than the pure, or “fine”, silver that had been used before and remained the basis for the British pound until 1816.


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01-25-2012, 07:47 PM
Aren't we running out of gold? O_o

01-25-2012, 08:38 PM
I think Ron Paul backs a mix of the gold standard and current currency to prevent the Fed printing money whenever it wants. He's held that view consistently.
Gingrich is a joke (which is probably why he's currently leading - the republicans love crazy) who cheated on his taxes, supports child labour and doesn't think Palestinians existed. He'll change his view to anything if paid enough.

01-25-2012, 09:03 PM
Originally Posted by Tragic Typos
Aren't we running out of gold? O_o

Your question got me wondering too.....:hmm:

How much gold is there ?

In the world there are currently somewhere between 120,000 and 140,000 tonnes of gold ‘above ground’. To visualise this imagine a single solid gold cube with edges of about 19 metres (about three metres short of the length of a tennis court). That's all that has ever been produced.
Divided amongst the population of the world there are about 23 grams per person, about 1.2 cubic centimetres each. This equates to about $250 - $350 worth per person on Earth, depending on the current price.

What's it worth ?

The value of that short tennis court sized cube is about $1.8 trillion. This compares to the US government’s sovereign debt of $6.9 trillion, which until 1971 was part-backed by gold. The US Gold Reserve is just over 8,000 tonnes - which is about 6% of the total gold ever mined. It is worth about $100 billion, or 1.5% of the US national debt.

$1.8 trillion is about one fourteenth of the paper based international bond markets, which themselves, at about $26 trillion, are about two thirds composed of western government sovereign debt almost all of which has appeared, co-incidentally, since 1971 and the declared supremacy of paper money, which was what allowed governments to borrow without caution. The total gold content of the world would pay - at current values - about 7% of the international bond market's sovereign debt. But of course 75% of the world's gold is not available to governments - being held privately as jewellery, bullion and coin. In fact only about 30,000 tonnes, about 1% of the world's sovereign debt is what is held in central bank gold reserves.
Meanwhile the entire gold stock of the world - including the privately held bulk - is much less than one half of one percent of the underwritten risk in the global financial derivatives markets.
The world has placed absolute trust in paper currency denominated assets. Investors have shunned gold for about twenty years while the notional value of paper based financial assets has exploded.

Who owns the gold ?

About 30,000 tonnes of the world’s gold [20-25% of above ground inventory] is held in central bank vaults.
Major Central Bank Reserves (2000)
USA 8139
Germany 3469
IMF 3217
France 3025
Switzerland 2590
Italy 2452

The totals for other central banks tail off rapidly after these main holders. Most only hold a few hundred tonnes, and together they make up a bit over 30,000 tonnes in all.
The rest is held by individuals in the form of gold jewellery [approx 70,000 - 80,000 tonnes], coin and privately held bullion [combined at 20,000 tonnes].
90% of the gold above ground has been mined since the start of the California gold rush in 1848. Modern power machinery and chemicals have steadily lowered the price at which gold can be extracted. The average production cost of the world's biggest producer - South Africa - is about $238 per troy ounce. 1997 industry estimates by the Federal Reserve Board suggested an average production cost worldwide of $300 per ounce.

Gold still underground

Where it is known about with reasonable confidence, and can be extracted economically, un-mined gold appears on the books of mining companies as ‘reserves’. There remains as reserves about 40% of the total of gold above ground - i.e about 50,000 tonnes. South Africa has 50% of the world's known stock of un-mined gold.

Inelastic supply

Gold is difficult to find in commercial quantities. It also takes time, typically 5 years, and plenty of money to bring mines into production. In this sense the supply side of the gold equation is relatively constant.
One of the features of this is that boom times encourage investment which takes a considerable time to work through to production and - eventually - to worked out mines. After a boom, when investment decisions may be made on over-inflated expectations of ultimately achievable prices, there is a tendency to subsequent overproduction and poor prices for a considerable period.
The gold price boom of 1979/80 resulted in steadily increasing production all over the world from a stable base of 1200 tonnes annually to a peak of above 2600 tonnes in 1999. All major producing countries except South Africa substantially increased production in this period.
Production then levelled out and started to dip slightly, as mines were exhausted and poorer mines shut. Also the uninspiring gold market encouraged a decrease in exploration which now means there are a lower number of new mines coming into production than is expected to be required by the market.

Inflation of the gold supply

Nonetheless for the time being gold is still being mined and refined at the rate of almost 2,600 tonnes per year. Thus the world supply of above ground gold is increasing - or inflating - at just over 2% annually. At current rates the gold supply is growing the under-sized tennis court cube at about 12 centimetres a year. It will reach a full tennis court sized cube in about 20 years time.

Physical gold quantities

The following table compares kilogram quantities of gold with monetary values, spatial volumes, and meaningful human measurements, to get a feel for the numbers.
0.008 $100 0.00041 A British sovereign coin
0.031 $390 0.00161 US Eagle / Canadian Maple coin
0.100 $1,254 0.00518
0.500 $6,269 0.02591
1 $12,539 0.0518 1 kilo - a golf ball sized sphere
2 $25,077 0.1036
3 $37,616 0.1554
4 $50,154 0.2073
5 $62,693 0.2591
6 $75,231 0.311 A can of 'Coke'
7 $87,770 0.363
8 $100,309 0.415
9 $112,847 0.466
10 $125,386 0.518
12 $156,000 0.645 A standard 400 oz bullion bar
20 $250,772 1.04 A litre bottle of water
50 $626,929 2.59
100 $1,253,858 5 A good sized deposit box
1,000 $12,538,580 52
10,000 $125,385,802 518 Half a cubic metre - fits in a corner of a small bank vault.
100,000 $1,253,858,025 5,181
1,000,000 $12,538,580,000 51,813 A small living room - and more than twice Britain's gold reserve.
8,139,000 $102,051,504,000 421,710 The US gold reserve fits into a town house. Fort Knox is mostly empty space!
30,000,000 $376,163,190,000 1,554,404 The world's total financial reserve of gold (central banks + significant global financial institutions)
100,000,000 $1,253,858,024,000 5,181,347 The approximate total of all privately held jewellery, bullion and coin
140,000,000 $1,755,401,234,000 7,253,886 All the gold in the world - A block with edges 3 metres short of a standard sized tennis court.
$7,000,000,000,000 The current US sovereign debt (which excludes future pension and health obligations, none of which have been reserved against in the public accounts)

(updated: 2007)

Alhamdulillah - we learn something new everyday!

Funny thing is - even though South Africa is the worlds largest producer of gold, and holds more than 50% of the worlds unmined gold........gold is actually pretty costly here! ^o)

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